Carclo - Stabilising the business
Carclo’s H120 results show that the remaining businesses following the exit from Wipac in December provide a basis for a sustainable group going forward. The continuing businesses generated £56.1m revenues and £3.3m underlying EBIT. However, there remain significant challenges in reaching agreement on long-term funding with the lending bank and pension trustee. Our estimates will remain under review until these are resolved.
21 Jan 20
Carclo - Sale of Wipac completed
Carclo has exited from its loss-making Wipac business which has been acquired by Wuhu Anrui Optoelectronics, a manufacturer of LED-based automotive lighting. This ensures continuity for both customers and employees. Carclo’s pension scheme will receive £3.5m of the net proceeds of the sale while another £5.0m will be used to reduce debt. Our estimates will remain under review until the interims in mid-January.
02 Jan 20
Sector Note -
Election implications for the Industrial sector: The Conservative Party’s now stable working majority provides clarity, with the withdrawal agreement expected to be rapidly enacted. Status quo in most policy areas, except a stark change from a promised fiscal stimulus through higher spending on public services and investment programmes, which could kick-start activity. We see a recovery in consumer confidence boosting activity in the DIY and housing sectors, and greater infrastructure expenditure will also boost a number of construction-related industrials. While the sector participates in a Boris Bounce, we regard the recent strength of sterling cautiously, affecting international competitiveness and reducing the translation of overseas earnings, although it helps to reduce the price of imported raw materials. The renewed threat of a no deal Brexit has resulted in sterling giving up much of its gains.
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18 Dec 19
Carclo - Wipac woes overshadow CTP improvement
Carclo’s FY19 results show the deleterious impact of the issues at Wipac, which overshadowed profit growth at both the Technical Plastics (CTP) and smaller Aerospace divisions. Group revenues decreased by 1% y o y while underlying EBIT of £1.3m adjusted for exceptionals, including a price concession on exit from the mid-volume automotive business (effectively a revenue impairment), fell by £2.4m to £8.4m (unaudited). Our estimates remain under review until there is more clarity on the exit from Wipac.
15 Nov 19
China Caixin PMI rises in Oct; South Korean exports miss estimates; Parker Hannifin revises down guidance
CRH (CRH LN, £22bn) completes disposal of European Distribution business for EV of €1.64bn, payable in cash | Chemring (CHG LN, £563m) receives contract award for further 75 units under its US DoD’s “Aerosol & Vapor Chemical Agent Detector” Program to be delivered in FY20; expects adj. op profit to be “slightly ahead of expectations” | Carclo (CAR LN, £8m) FY19 prelims (31/03) reports revenues down ~1% y/y and u/l op. profit down ~88% reflecting deterioration in LED Tech Division; sales process for this division is ongoing; Technical Plastics Division & Aerospace Division both saw y/y improvements in profits
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01 Nov 19
Sector Note - Machinations: finnCap Industrial Technology quarterly sector note - Q3 2019
No-deal Brexit now the default: The change in the UK political leadership clearly signals that the likelihood of a no-deal Brexit has moved from 100-1 and now appear to be odds-on. Michael Gove recently confirmed that this should be regarded as the default position that we should all prepare for. Already, the new Prime Minister Boris Johnson has highlighted a number of new policies and spending projects, with a focus on high-profile infrastructure projects. The chequebook is open, with an additional £2.1bn of funding just announced. Deficit control and reduction is no longer the prime objective and Treasury funding will be used to ease the process of Brexit. We hope this may be a good news for those at the sharp end of international trade.
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16 Aug 19
Carclo - Wipac move into mid-volumes under review
Carclo has announced that while the Technical Plastics and Aerospace divisions have started FY20 well, the costs associated with ramping up an unprecedented number of new low-volume lighting programmes at Wipac remain unacceptably high. Management is therefore reviewing its decision to move into the mid-volume vehicle market. We place our FY20 estimates and valuation under review until further information is provided when the FY19 results are announced in July.
12 Jun 19
Sector Note -
Where are we in the cycle? There has been plenty of debate about what stage of the cycle we are in at present, and indeed the shape and duration of the current prolonged upcycle. We are, clearly in the more mature stages of the cycle and it is true to say that certain economic indicators have weakened. It currently appears that we are not heading into a downturn, or a recession, but rather a flattening-off in the global long up-cycle. The good news is that Chinese stimulus measures appear to be having some positive effects (recent Q1 data show GDP growth of 6.4% while industrial production rebounded 8.5% in March); equally, Sino/US trade disputes appear to be progressing towards being resolved, or at least ameliorated, which holds open the possibility of a relaxation of tariffs (or at least no additional ones). UK data continues to point to meagre growth, but this is being affected by Brexit. Growth remains lacklustre and the recent slight increase in PMI is related to additional Brexit buffer stock-building in March. The risk now is that the EU ‘flextension’ until the Autumn means that there is scope for some short-term destocking – which will cause a gap in some manufacturers’ orders. This lack of clarity and demand volatility causes production inefficiencies and makes business planning and forecasting more difficult, causing some to postpone investment decisions. The decline in business investment remains a serious issue for heavier, late-stage industrial equipment manufacturers and for longer-term UK competitiveness. This is especially the case given the revolution in manufacturing coming from IoT automation, robotics and other innovations such as electric vehicles/battery technology, 3D printing etc. If we fall behind in these areas, it will seriously damage longer-term productivity and international competitiveness
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18 Apr 19
Carclo - Wipac costs higher than expected in Q419
Carclo’s year-end trading update notes that Wipac’s costs remained at higher than expected levels during Q419 as the business endeavoured to address the challenges of commencing production on an unprecedented number of new programmes at the same time. As a result, we cut both our FY19 PBT and EPS estimate by 9%, while leaving our FY19 revenue estimate and FY20 estimates unchanged.
18 Apr 19
Poor year-end trading update: WIPAC woes
The group’s year-end trading update confirms difficult conditions have continued at its WIPAC division, which results in the group’s profitability being below the expectations set out in January. Trading at Technical Plastics and Aerospace by contrast has been fine, with YoY profit growth. Net debt is close to breaching debt covenants, but banks are supportive and providing a one-month deferral. The shares have anticipated the reduction in forecasts, trading on a P/E of 3.1x, but despite its low rating, with risks remaining, we avoid the shares for the time being.
17 Apr 19
Carclo - Recovery postponed
Carclo has announced that the issues associated with initiating multiple low-volume lighting programmes in parallel that adversely affected H119 have continued throughout Q319. At the interim stage management believed that these issues would be resolved by the end of Q3, supporting a second half recovery, but now expects that second half profit levels will be similar to the first half. We revise our estimates, cutting EPS by 37% in both FY19 and FY20.
23 Jan 19
Sector Note -
finnCap’s Industrials Brexit Survey. As Brexit is now only around 100 days away, we decided that – despite continuing uncertainties – it would be interesting to conduct a 10-question survey to investigate how management expects the small and mid cap Industrial sector to be affected by Brexit. We focused on what sensitivities they have to potential supply chain delays, raw material import prices, reductions in regulatory red tape and whether they expected changes to their ability to export to the EU, and if there are opportunities to boost trade with the rest of the world. Overall, 82% of companies responded that Brexit would be negative for their company with only 18% expecting no effect. Not a single company thought it would be positive. We hope that the survey responses will not only be of valuable insight to investors but also give company directors a broader consensus of how their competitors, customers and suppliers are all likely to react.
CAR AMPH ALU AVG CAPD FLO GHH MPE RNO RBN SOLI SOM SCE TRT TRI VEL ZAM HDD
19 Dec 18
Carclo - FY19 likely to be a game of two halves
As flagged in the October trading update, Carclo’s H119 performance was adversely affected by delays in commencing three medical programmes. Moreover, all of the new vehicle production programmes planned for FY19, with their attendant start-up inefficiencies, started during the first six months. While these events held back first-half performance, they augur well for a second-half recovery. We therefore leave our estimates broadly unchanged. The reduction in our indicative valuation from144-153p to 125-133p reflects a 24% drop in the prospective P/E multiple for automotive peers since June, rather than a change in Carclo’s investment proposition.
16 Nov 18
Interim results – on track for FY expectations
The group has experienced a tough H1, with delayed customer programmes and production inefficiencies. Management continues to flag a much stronger H2 as the delayed programmes are now in production ramp up stage and as operating efficiencies start to flow though to improving margins. Crucially, full-year expectations are maintained, with a lower level of debt also anticipated. The shares remain lowly rated, reflecting the recent disappointing trading updates.
13 Nov 18
Carclo - Poor H1 means greater H2 reliance
The group has announced its H1 trading update signalling that while H1 performance has been below expectations, it has a scheduled pick-up in production and efficiency gains that will benefit margins. As such, the Board states its full-year expectations remain unchanged. While we keep existing forecasts, we feel this announcement is unlikely to raise confidence as it adds a greater dependence on H2 forecast delivery. We reduce our PT from 133p to 90p and maintain our Hold rating.
12 Oct 18
Carclo - FY19 expectations unchanged despite slow first half
Carclo has announced that three new medical programmes were delayed by customers during H119 and that while these programmes had all entered production successfully by the end of the period, the delays resulted in H119 underperformance for the Technical Plastics division (CTP). Although the LED division performed in line with management’s expectations and the smaller Aerospace division beat expectations, H119 trading for the group as a whole was below management’s expectations. Since management expects to correct the first half shortfall in the second half, we leave our estimates unchanged.
12 Oct 18
Small Cap Feast
Azalea Energy—oil and gas production and development company based in Louisiana, United States. Net production of 13 MMcfe/D (2,200 boepd) and total 1P proved reserves of 91 Bcfe (15.1 mmboe), 2P reserves of 111 Bcfe (18.5 mmboe) raising up to $38m, expected mkt cap over $100m. DueOct Summerway Capital investing company established to acquire companies or businesses which the directors of the Company believe have the potential for strategic, operational and performance improvement so as to create shareholder value. Offer TBC, market cap TBC expected 19 October Admission is being sought as a result of the proposed RTO of Cambian Group plc following completion of the acquisition by CareTech a leading provider of specialist social care services, supporting adults and children with a wide range of complex needs. No raise, market cap TBC expected 19 October. PetroTal (TAL.TO) - The exploration and production company focused on oil assets in Peru is seeking a secondary AIM quotation before the end of 2018. Path Investments— First acquisition of a 50 per cent. participating interest in the producing Alfeld-Elze II gas field located 22 kilometres south of Hannover in Germany. Seeking £10m raise. Due early Oct Green Man Gaming—pure play e-commerce and technology company in the digital video games industry. revenue CAGR growth of 26.7% in the last three years to £47.5m. Due Mid October 2018. EBITDA Profitable. Offer TBA Crossword Cybersecurity PLC* (NEX:CCS)—the technology commercialisation company focusing exclusively on the cyber security sector is exploring its options in relation to a potential move to the AIM market of the London Stock Exchange which, if it were to proceed, would likely take place over the next few months.
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12 Oct 18
This edition we dedicate to the nascent electric vehicle market and associated supply chain. We have assessed the entire ecosystem in the UK and what technologies are currently available, and would highlight the following three conclusions: 1) The UK has developed a remarkably good ecosystem to enable the development and commercialisation of EV components and technology; 2) The dawn of the fully electric vehicle is going to bring about a radical simplification of the Automotive supply chain; and 3) EV isn’t the only way forward, and we see a clear role for Hydrogen, Biofuels and Synfuels.
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10 Oct 18
Small Cap Breakfast
CentralNic-Schedule 1 from the business operating in proprietary retail platforms selling domain names and associated web presence services including hosting and email on a subscription basis, has acquired KeyDrive S.A which constitutes a RTO. Raising £24m at 52p, combined market cap of £88.7m Trackwise—established business that manufactures specialist products using printed circuit technology. Offer TBA. Due Late July Ovoca Gold (to be renamed Ovoca Bio PLC) - RTO of IVIX, a Russian company developing a drug candidate for the treatment of female sexual dysfunctions. No monies to be raised, market cap of £8.5m, due 30 July Nucleus Financial—independent wrap platform provider . FYDec17 revs £40.36m and PBT of £5.1m. Offer TBA. Due late July. Kropz PLC-Intention to float by the emerging plant nutrient producer with an advanced stage phosphate mining project in South Africa and exploration assets in West Africa
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19 Jul 18
Abzena (ABZA LN) Telix Pharma deals highlight an increasingly integrated offering | Best Ideas 2018 - H1 Review 9% outperformance for our picks YTD | Carclo (CAR LN) Non-binding proposal from consort | ECO Animal Health Group (EAH LN) Another good year: EBITDA and dividend ahead of estimates | Ergomed (ERGO LN) CFO appointed | First Derivatives (FDP LN) Acquisition of remaining minority stake in Kx Systems | Sigma Capital Group (SGM LN) Site delays could impact short term, 6% reduction to FY18e PBT | St Ives (SIV LN) Change complete – focus moves to growth | StatPro Group (SOG LN) Acquisition of regulatory risk services bureau | The PRS REIT (PRSR LN) Hits target yield, sees some construction delays
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02 Jul 18
Positioned for recovery
Delays in the placement of certain customer project awards and weaknesses in operational performance, particularly in the Technical Plastics division, meant that Carclo did not meet management’s original FY18 profit targets, although the performance was in line with revised guidance. Most of the delayed contracts have now been placed and management has taken steps to improve margins. Demand from medical customers for precision plastic moulding and for LED lighting in luxury cars, supercars and mid-volume models remains good so we leave our estimates and valuation range broadly unchanged.
05 Jun 18
Abzena (ABZA LN) Forecast update | Carclo (CAR LN) Review completed, reassuring outlook | Driver Group (DRV LN) Continued earnings momentum | Fulcrum Utility Services Limited (FCRM LN) In line results; Positive outlook supported by strong order book growth | Gooch & Housego (GHH LN) Good H1 18, well set for H2 and beyond | Harwood Wealth (HW/ LN) 9 H1 acquisitions adding £310m AuI, forecasts unch | Renold (RNO LN) Cautiously optimistic | Vp (VP/ LN) A year of significant growth and strategic progress | WYG (WYG LN) Signs of stability in H218; FY19 guidance maintained
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05 Jun 18
Contract delays to affect H218 performance
Carclo has recently announced that its FY18 performance is likely to be lower than previously expected. This is because of contract delays affecting both the Technical Plastics (CTP) and LED Technologies (LED) divisions as well as a delay to the anticipated ramp-up in a non-medical project for CTP, which management expected would benefit H218. We reduce our FY18 and FY19 estimates, introduce FY20 estimates and revise our indicative valuation range from 177-187p/share to 145-154p/share.
22 Jan 18
Trading significantly behind; FD, chairman to leave
After the Interims in November, we said that forecast risk was higher due to the c37:63 H1:H2 PBT weighting, but that management was confident of achieving this. Unfortunately, this has not proved possible and results for FY18 are now anticipated to be significantly below previous expectations. Forecast downgrades are 27% off PBT in both FY18 and FY19. Forecast net debt of £32.9m is 2.1x EBITDA and well within covenant levels (2.75x). The FD and the Chairman are to leave and Mark Rollins, highly regarded by us from his time at Senior, becomes Chairman. There are good businesses within the Group, but there is a long road of confidence rebuilding ahead. We reduce our target price to 91p (P/E of 10x FY18) and move to Hold.
15 Jan 18
Resetting the bar
As indicated in November, the FY18 out-turn was always dependent on a handful of new orders being awarded in H2. Unfortunately news came this morning that these have now been deferred (but importantly not lost) by the associated customers (2 at Technical Plastics and 3 at Wipac), along with the non-ramp up of volumes at a major non-medical TP client. As a result, FY18 PBT will be “significantly” below previous expectations. Additionally, given these programs would have contributed towards next year’s numbers, the company has also prudently reduced FY19 guidance - albeit still representing “healthy YoY growth”.
15 Jan 18
ATTRAQT Group (ATQT LN) CEO stepping down, trading in line with October update | Bodycote (BOY LN) Good year end trading update | Carclo (CAR LN) Trading significantly behind; FD, chairman to leave | Sinclair Pharma (SPH LN) Trading update: stronger H2 as expected, EBITDA in-line |
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15 Jan 18
Carclo - Positioned for H2 recovery
As flagged at the AGM in September, performance at Carclo’s Technical Plastics division (CTP) was held back by key new programmes slipping from H118 to H218 as well as some operational issues, which have been largely resolved. This was balanced by outperformance in the LED Technologies division (LED), where the level of design, development and tooling activity was ahead of expectations. Management anticipates that full year trading will be in line with expectations, so we leave our estimates broadly unchanged.
23 Nov 17
“Stronger” H2 expected after “solid” H1
Successful investing is all about detail. Take the UK’s latest new car registration figures, which were down -4.6% Oct’17 YTD according to the Society of Motor Manufacturers and Traders (SMMT). Clearly the big boys – namely the large OEMs (eg Ford), suppliers (GKN) and dealers (Pendragon) - are having a difficult time, buffeted by more cautious buyers and environmental concerns over diesel engines (-14.9%).
14 Nov 17
Highlights this quarter: Economics: Generally, the data points to modest growth continuing, with a more positive trend in PMI surveys suggesting decent m manufacturing momentum over the next six months. Currency weakness continues to be a double-edged sword for U K manufacturers, with exporters gaining competitiveness while input prices have risen. There has recently been a divergence of sterling’s performance against the euro and the USD. Those in commodity or competitive product areas may well have seen margin erosion, while many in intermediary goods have already passed on price increases to their customers. With low unemployment, the prospect of tighter labour markets post-Brexit and public sector pay caps starting to come off also signals the potential for some labour inflation, long absent from the UK industrial scene. Topic of the quarter: We believe that powerful macro and sectoral pressures will drive further significant changes to the manufacturing supply chain over the next few years. We investigate some of these pressures, with the move to outsource suppliers to low- cost centres, like China, now seeing a slight reverse flow with some restoring to shorten complex and often inflexible supply chains. We see systems technology facilitating greater supply-chain control and efficiency. Brexit will present challenges to the UK supply chain with price and time to market barriers likely to rise, presenting challenges to the UK’s highly integrated and time-sensitive supply chain. Slick distribution infrastructure and greater information sharing with suppliers are likely to prove winning strategies in optimising logistics and gaining stock efficiencies. Sector valuation: The industrials sector has continued to exhibit strength, with small-cap industrials outperforming by 2 % on last year and larger cap industrials by 17%. Currency and improving economic data have been a positive for the sector. While some other sectors have seen a pick-up in profit warnings over recent months, industrial technology companies have announced generally positive or in-line trading updates that have helped to drive the small-cap Industrials to an EV EBITDA of 8.4x and a P/E of 16.7x with the traditional small-cap discount narrowing.
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27 Oct 17
Carclo is focusing investment on its two larger established businesses – Technical Plastics (CTP) and LED Technologies (LED). Here a differentiated offer and long-term relationships with customers provide good earnings visibility and higher probability of a sustainable return. This strategy delivered strong revenue and profits growth during FY17. Despite a temporary setback at CTP during H118, which was balanced by outperformance at LED, growth appears set to continue, underpinned by contracts with blue-chip customers.
03 Oct 17
On track for FY18 with strong H2 expected
One of Carclo’s many attractions is its broad spread of activities, spanning multiple geographies, technologies and vertical markets. When one division stumbles another picks up the baton. And so it has proved today, with the group saying this morning that it is “on track” to hit FY18 numbers, despite experiencing some H1 “challenges” in Technical Plastics (Re: program delays and operational difficulties) on top of temporary weakness in Aerospace demand.
07 Sep 17
Carclo (CAR): AGM statement in line, but greater H2 weighting (HOLD) | Shield Therapeutics (STX): Iron tired of being tired all the time (BUY) | Water Intelligence* (WATR): Building market presence (BUY) | Chariot Oil & Gas* (CHAR): Rig assigned for Rabat Deep drilling (CORP) | Frontier Developments* (FDEV): A stellar year, and it’s just the beginning (CORP) | Atalaya Mining (ATYM): Interim results (BUY) | SCISYS* (SSY): FY 2017 in line with guidance so far (CORP)
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07 Sep 17
Advanced Materials – the building blocks of Tomorrow’s World
Whether we know it or not, advanced materials are a core component in the everyday life of the everyday person. They are the key material in items we often disregard, such as printer inks and lotions, to objects which defy the laws of gravity like the Airbus A380 and London’s Shard. Furthermore, these materials are not only essential to many objects and structures, but, due to their superior qualities, are the key to the advancement of many industries. One such example is the use of carbon fibre which offers five to ten times more rigidness, stiffness, and strength than its aluminium counterpart. As a result of these impressive qualities, motorsport and athletics have improved ten-fold since their mainstream use and new records are broken every year.
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26 Jul 17
We recently hosted our annual Industrial Technology dinner with 14 companies, many of which are active in the materials science arena; having focused previously on composite materials in the aerospace sector, in this edition of Machinations we focus on graphene, with its unique and potentially game-changing qualities and potential applications. Investments in this area remain fairly early stage, but could potentially reap huge rewards. Graphene is well represented in the UK small-cap market by several players.
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27 Jun 17
Strong growth in profits as expected
Carclo has refocused investment in its established businesses (Technical Plastics and LED Technologies), where a differentiated offer and long-term relationships with customers provide good earnings visibility and higher probability of a sustainable return. This strategy delivered strong revenue and profits growth during FY17. This growth appears set to continue, underpinned by contracts with blue-chip customers. We increase our estimates of revenues attributable to Technical Plastics while slightly reducing PBT and EPS to reflect higher IAS 19 finance charges. We raise our indicative valuation to 181-191p (previously 153-162p).
15 Jun 17
High growth healthcare/engineering stock trading >30% below SOTP valuation
You don’t have to be a ‘Silicon Valley’ tech startup to deliver double-digit top line growth. Carclo – an innovative designer and manufacturer (70% non-UK sales) of complex plastic parts, cables and premium LEDs (see below) to the healthcare and engineering sectors - has been doing exactly this for years.
15 Jun 17
N+1 Singer - Morning Song 06-06-2017
Amino Technologies (AMO LN) Another strong period | Carclo (CAR LN) Positive trading; improvement in pension and reserves | FreeAgent (FREE LN) Debut prelims strong; executing growth strategy | Gooch & Housego (GHH LN) Good H1 growth with strong prospects | IDOX (IDOX LN) Solid H1; focused strategy driving execution | Oxford Metrics (OMG LN) Benefits of new strategy beginning to show | Vp (VP/ LN) Strong momentum drives FY18 upgrades | WYG (WYG LN) Positive cashflow surprise, FY18 guidance reiterated
CAR VP/ AMO GHH IDOX OMG WYG
06 Jun 17
Gooch & Housego^ (GHH): Interim results – in line with FY expectations (HOLD) | Carclo (CAR): FY results slightly ahead of expectations (BUY) | GB Group (GBG): International and acquired growth drive GB on (BUY) | Joules Group (JOUL): Trading update beats expectations (BUY) | Acal (ACL): Strong H2 backed by cash flow, strategy delivering (BUY) | Amino Technologies* (AMO): Strong trading update (CORP) | KCOM* (KCOM): Prelims on track – stronger second half (CORP) | Fulcrum (FCRM): Converting a large market opportunity (BUY) | Idox (IDOX): Interims demonstrate expansion potential (BUY)
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06 Jun 17
All going to plan
Both of Carclo’s larger divisions, Technical Plastics (TP) and LED Technologies, grew in line with management expectations during FY17, while the smaller Aerospace division continues to experience stable trading conditions. FY18 has started well with the announcement of a second mid-volume project for Wipac. This new award underscores the relevance of the recent FLTC acquisition, which substantially enhances Wipac’s ability to progress multiple projects simultaneously. We leave our estimates unchanged but slightly increase our indicative sum of the parts valuation.
13 Apr 17
Continued progress since interims
Carclo has announced that H217 trading remains strong and the outlook for the full year is in line with its expectations. Growth is being driven by the two larger divisions, Technical Plastics (TP) and LED Technologies, while the Aerospace division is experiencing stable trading conditions. We leave our estimates unchanged, but note potential currency upside should foreign exchange rates remain at current levels for the remainder of FY17.
01 Feb 17
600 GROUP | ACCSYS TECHNOLOGIES | AGGREGATED MICRO POWER HLDGS PLC | ALUMASC GROUP | ANGLO-EASTERN PLANTATIONS | AVINGTRANS PLC | CAPITAL DRILLING LTD | CARCLO | FENNER PLC | FLOWTECH FLUIDPOWER PLC | GLOBAL INVACOM GROUP LTD | GOOCH & HOUSEGO PLC | HARDIDE PLC | HAYWARD TYLER GROUP PLC | IOFINA PLC | M.P.EVANS GROUP | R.E.A. HLDGS PLC | REDT ENERGY PLC | RENOLD | ROBINSON | SOMERO ENTERPRISE INC | SURFACE TRANSFORMS PLC | TRANSENSE TECHNOLOGIES PLC | TRIFAST | ZAMBEEF PRODUCTS
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19 Dec 16
Innovate, specialise, integrate, globalise
Carclo has refocused investment in its established businesses (Technical Plastics and LED Technologies), where a differentiated offer and long-term relationships with customers provide good earnings visibility and more certainty of a return. This strategy delivered strong revenue and profits growth during H117. This growth appears set to continue, underpinned by long-term relationships with blue-chip customers. We leave our estimates and indicative valuation broadly unchanged and introduce our estimates for FY19.
01 Dec 16
eg solutions* (EGS): New contract shows the full range of eg’s solution (CORP) | Hayward Tyler* (HAYT): Interims highlight significant 2H weighting needed (CORP) | Carclo (CAR): Decent Interim performance – on track for FY (BUY) | Wentworth Resources (WRL): Q3 results (BUY) | Castleton* (CTP): Australian contract win (CORP) | Artilium* (ARTA): Another new MVNO agreement signed (CORP) | Redcentric* (RCN): Appointment of forensic accountants and interim CFO (CORP)
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15 Nov 16
PTD acquisition the perfect match
On 14 October Carclo acquired US-based Precision Tool & Die (PTD) for an initial consideration of $5.5m (c £4.5m). The acquisition has been funded through a placing raising £7.7m (net) at 120p/share. H117 trading was in line with management expectations. We revise our estimates accordingly and derive an indicative valuation of 144-152p/share.
27 Oct 16
Acquisition and placing
The group has announced an acquisition of a US-based precision tooling and injection moulding business, selling into the medical device sector, for $6.5m, accompanied by the announced proposed placing to raise £8.0m. We think the acquisition looks a decent fit and provides good customer and geographic extension to existing operations. The net effect of the acquisition and placing is broadly EPS neutral. The shares trade on a P/E of 11.3x followed by 10.0x. We maintain our Hold rating.
14 Oct 16
After the severe short-term reaction to the Brexit vote, the UK manufacturing PMI now signals a return to more normal patterns and the stock market has recovered. Nevertheless, confidence remains weak. In the short term, it has largely been a phoney war. Sterling weakness has provided an opportunity for exporters. However, imported raw materials have also increased in price, as seen in the September inflation report with the input price index up 7.6%. Factory gate prices are lagging behind so beware of factory margins being squeezed. The reporting season has largely been devoid of serious shocks, with some order placement delays. However, due to the post Brexit fall in bond yields Carclo signalled a significant rise in its pension deficit, which wiped out its distributable reserves and caused it to cancel the previously declared dividend. We see potential for further bad news on pension deficits, with a number of larger industrials having significant pension liabilities that can only have grown since the referendum.
CAR SIXH AMPH ALU AEP AVG CAPD FENR FLO GINV GHH HAYT IOF MPE RE/ RED RNO RBN SOM SCE TRI ZAM TRT HDD
28 Sep 16
Trading well but bond yields affecting dividend
The two divisions driving growth – Technical Plastics and LED Technologies – are both performing well and in line with management expectations, so we leave our earnings estimates unchanged. However, low corporate bond rates have resulted in a significant increase in the pension deficit, meaning that management may not be able to use the profit growth to fund Carclo’s progressive dividend policy. As the dividend suspension does not reflect any issues with profits growth, we reiterate our earnings estimates, which look for 15% adjusted PBT growth in FY17.
01 Sep 16
Could Brexit be a positive for the UK Industrials sector? While the EU and UK are important to each other in terms of trade, the level of that importance is asymmetric: 44% of UK exports go to the EU and a further 10% go to countries with free trade agreements with the EU; only 15% of EU exports go to the UK. As a result, we feel that UK bargaining power is relatively weak and we need to accept the possibility that the UK drops out of the single market and trades under WTO terms with Europe. The extent to which this is a positive or negative for UK Industrials depends entirely on the value of Sterling versus the Euro or US Dollar. We analyse this and conclude that with a 7% (or greater) depreciation of Sterling (versus pre-Brexit levels), all the costs associated with WTO trade are more than compensated for. Big exporters become strategic winners and big foreign FX earners become financial winners. Largely domestic players are at risk. Export or die!
Economic DataIndices and Markets
18 Jul 16
Looking to wider horizons
The FY16 results showed that the core businesses of Technical Plastics and LED Technologies are continuing to grow revenues and expand margins. Management talks with enthusiasm about driving Technical Plastics into exciting new production technologies, and in LED Technologies the win of a medium volume sports car programme could lead to a significant increase in revenues and profits in the medium term. However, in our view, the relative earnings multiples still do not fully reflect the quality and potential of these businesses.
22 Jun 16
Lights the Way Ahead
Carclo is a precision engineering business that has been refocussed towards its three core businesses. Two of these, Technical Plastics and LED Technologies are growing fast. The third Aerospace is a solid earner and gradually transitioning away from the control cable business as that system is being phased out by aircraft manufacturers.
17 Jun 16
Core divisions remain strong
Final results were in line with expectations and the recent trading update. The closure of CDS, announced in May, is disappointing, but pragmatic, and ensures that further costs are avoided. Within the core divisions, we continue to view Wipac’s loss of the VW programme as a one-off and continue to see strong growth potential from both Technical Plastics and LED Technologies. Indeed, the announcement today of a WIpac win in the medium volume sector is good news and we will monitor progress closely in this area. We increase our price target to 176p (P/E of 14x FY18 EPS) and remain at Buy.
07 Jun 16
Revolution Bars Group: Happy Hour (BUY) | Gooch & Housego^: Interim results, recovering from a tough Q1 (HOLD) | iomart*: Typically strong prelims (CORP) | Intercede*: Prelims highlight opportunity (CORP) | Iofina*: Restructuring of Convertible Notes (CORP) | Carclo: Final results ahead of expectations (BUY)|Independent Oil & Gas*: Skipper update (CORP)|Idox: Reassuring interims (HOLD)
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07 Jun 16
Carclo (CAR LN) Core divisions remain strong | Goals Soccer Centres (GOAL LN) Time to take a serious look | Gooch & Housego (GHH LN) H1 decline as expected, FY guidance unchanged | Herald Investment Trust (HRI LN) Good long term performance | IDOX (IDOX LN) Strong interims and confident outlook | iomart Group (IOM LN) Solid progression with 9% organic growth in Cloud | Minds + Machines Group (MMX LN) .vip significant momentum continues | UDG Healthcare (UDG LN) Growing share in a growth market | Vp (VP/ LN) A strong conclusion to a very busy year | WYG (WYG LN) FY16 results in line, momentum building
CAR GOAL GHH HRI IDOX IOM MMX UDG VP/ WYG
07 Jun 16
Exit from CDS; Focus on core divisions
It is clearly disappointing that CDS is not to progress to commercialisation and that £4.9m of investment will be written off. However, management has taken the difficult decision to exit CDS in order to avoid prolonged further cost for an uncertain benefit. This does not markedly change the investment case in our view; we await results on 7th June but expect the core divisions to be performing strongly and remain at Buy.
16 May 16
Trading in line
As was the case in February, this is another reassuring update which confirms a stronger H2 and also confirms that Carclo is not exposed to the weaker areas of general industrial activity/oil & gas. As we have said previously, CIT is now history and the two main divisions have strong growth opportunities; we retain our target price of 156p and Buy recommendation
12 Apr 16
In Issue 2, we concluded that the VW emissions scandal was likely to result in faster development and adoption of hybrid and electric vehicles. In this issue, we discuss what we think will be a key megatrend of the 21st century: the strong push to decarbonise vehicles AND power generation. The implications for the Industrials sector are substantial and we attempt to identify some of the key winners and losers of what we think is now an unstoppable force. The full list starts on page 8 but key winners we identify are: Lithium, Copper, Hydrogen, Composites, batteries and fuel cells, electric motors, wind turbine components, solar cells, ac/dc convertors and all forms of power storage.
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04 Apr 16
Trading in line
A reassuring update which confirms a stronger H2 and also confirms that Carclo is not exposed to the weaker macro areas at present. As we said in November, CIT is now history and the two main divisions are ripe with opportunity; coupled with little exposure to general industrial activity/oil & gas, this is a strong investment case. We retain our target price of 156p and Buy recommendation.
04 Feb 16
ACCESSO TECHNOLOGY GRP PLC (ACSO LN) FY 2015 results comfortably in line | BCA MARKETPLACE PLC (BCA LN) Bullish EPS outlook driven by volumes, gearing and buyer finance | CARCLO (CAR LN) Trading in line | SKYEPHARMA PLC (SKP LN) GSK Q4 2015 results highlight Ellipta® sales ahead of expectations
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04 Feb 16
New capacity, new customer programmes
Carclo is delivering significant earnings growth, having rejuvenated and refocused since its exit from CIT earlier this year. The recent delay on a new VW model programme is a set-back, but doesn’t undermine the investment case. Management has repositioned and invested in growth opportunities, and over the next few years profits should see the fruits of this investment. The shares offer a strong investment case, on an attractive value with substantial EPS growth forecast for the next three years, and we initiate coverage with a 170p price target and Buy recommendation.
26 Nov 15
Core growth back in focus
Carclo's H1 results showed the underlying strength of its core business and the analyst presentation was confident in tone. The loss of the VW Phaeton programme is a frustrating bump on the road, but LED Technologies remains firmly on track with strong revenue growth and the significant win of a new manufacturer. Technical Plastics is performing well, with the new Chinese facilities due to start manufacturing in January 2016. These are quality businesses with strong long-term stories, but Carclo’s earnings multiples relative to established small-cap growth stories with similar dynamics have yet to fully reflect this.
23 Nov 15
Further upside expected
We moved to Buy from Hold earlier this week, following weakness in the share price. Having digested the results presentation and considered the Group’s growth prospects in more detail, we have increased our target price to 156p (from 135p) equating to c.14x FY17 EPS. CIT is now history and the two main divisions are ripe with opportunity; coupled with little exposure to general industrial activity/oil & gas, this is a strong investment case. Buy.
19 Nov 15
Strong H1; move to Buy
No surprises in the results following the pre-close in October. We view the loss of the VW programme as a one-off and continue to see strong growth potential from both Technical Plastics and LED Technologies. The shares have been weak in recent weeks and we move to Buy from Hold with a maintained target price of 135p.
17 Nov 15
news that VW is delaying its flagship Phaeton vehicle, which will now be launched as an all-electric vehicle. The short-term impact on our forecasts is not immaterial but the share price reaction appears overdone. In our initiation note we identified Carclo’s earnings multiples discount against its UK comparators with established growth stories. We think the extent of the discount is unjustified and see the long-term story remaining firmly intact, but accept that, although the delay is not of Carclo’s making, it may now take a bit longer to close the gap.
29 Oct 15
VW impact; forecast downgrades
Carclo appears to have been the unfortunate victim of VW’s need to clean up its act, with a flagship luxury vehicle now expected to be redesigned as an electric vehicle and the consequent delay thereby affecting Wipac’s performance this year and next. This means that we are downgrading FY16 PBT by 8% from £9.5m to £8.8m and FY17 by 10% from £11.2m to £10.2m. This impact from one programme is disappointing, but the underlying trends for the Technical Plastics and LED Technologies divisions remain positive. We reduce our SOTP target price from 148p to 135p and remain at Hold.
15 Oct 15
Trading in line
Trading is in line with expectations. LED Technologies is slightly ahead but recent weakness in Precision Engineering has offset this positive impact. We await updates later in the year on progress with the new Chinese facility and development of the new programmes in LED Technologies. We retain forecasts and remain at Hold with a 148p target price.
03 Sep 15
Carclo (CAR LN) Trading in line | Greene King (GNK LN) Upcoming Q1 update unlikely to be a positive ST catalyst | Horizon Discovery Group (HZD LN) Collaboration with Redx Pharma | Lookers (LOOK LN) Benfield acquisition for £87.5m – 12.5% upgrades in 1st full year (FY’16) | Redde (REDD LN) Upgrading PBT, strong growth drives dividend | Summit Therapeutics (SUMM LN) Dr Ralf Rosskamp appointed Chief Medical Officer
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03 Sep 15
Momentum continuing; CDS refocused
Momentum continues to be strong in the 2 main divisions despite currency headwinds. The spectre of CIT is now behind the Group and focus can be fully on Technical Plastics and LED Technologies with the added potential of Carclo Diagnostic Solutions (CDS). Within CDS, resources will now concentrate on the infectious disease and cardiac care tests where chances of commercialisation are more compelling. Discontinuation of the blood coagulation test leads to a £2.8m intangible impairment. On a P/E of 14.7x FY16 (EV/EBITDA 8.8x) the Group does not look expensive given the growth possibilities in coming years.
09 Jun 15